Before You Say Goodbye
No one wants to go through the foreclosure process and walk away from their home. It is a sad situation for everyone involved especially if there are extenuating circumstances that have made it difficult to pay their mortgage.
Fortunately, there are many steps homeowners can take before they reach foreclosure. Lenders do not want to take peoples homes. Lenders arent real estate agents, and they dont want to have to turn around and sell a property. Theyd much prefer to work something out with the homeowner to keep them in their home.
As a homeowner, you can take the initiative to stop the foreclosure process before it begins by contacting your lender and requesting a temporary loan modification. If the situation is dire and you cant stop the foreclosure process before it has already begun, you still have options, such as a short sale or declaring bankruptcy.
A foreclosure is a process, which gives the homeowner time to remedy the situation. You will not receive a notice of default and be kicked out of your home the next day. By speaking with a foreclosure counselor and a local foreclosure attorney, you will have a better idea of your states foreclosure laws and your personal options.
Statutory Redemption Laws Differ In Each State
Statutory redemption periods vary by state. Some states offer no legislation at all. If a foreclosure redemption is available, the redemption periods typically range from 30 days to some states that offer up to one year. Note that certain states provide borrowers facing an active foreclosure with the right to remain in their homes during the state-defined redemption period.
Often although not always, the credit report of the foreclosed borrowers will note the account has been a redeemed foreclosure.
What Happens At Auction
Your home will be sold at a public auction to the highest bidder, who must pay the full amount for the purchase immediately. This buyer will receive a trustees deed once the sale is complete, at which point he or she becomes the official owner. But foreclosure auctions dont always go as planned.
Unlike a traditional home salewhere the seller uses comparable properties to determine the sales pricemortgage lenders use a different formula to determine the listing price of a foreclosure. The starting bid usually includes the balance of the unpaid mortgage loan, interest owed, attorneys fees, and costs generated by the foreclosure processand together, those costs can sometimes push the asking price above .
If no one buys the home, the lender becomes the owner and the home is considered a bank-owned or REO property. Typically, the lender then works with a real estate broker to put the property on the market. Generally, REO properties are sold as is, which means the lender is selling the home in its current condition and will make no repairs or improvements .
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A Note About Purchasing Through Short Sale
A short sale occurs when the homeowner sells a home for less than what they owe on the mortgage because the value has declined. Foreclosure has not been completed with a home up for short sale. The homeowner still owns the home so you work through their REALTOR®.
When you buy a home in a short sale, the lender needs to approve your offer. You might spend a lot of time waiting for approval.
Redeeming Your Home After Foreclosure
A lender can initiate the legal process known as foreclosure. The borrower has one final opportunity to stop the foreclosure proceedings and prevent the sale at a public auction the foreclosure redeemed option.
Most lenders require that the foreclosed home owner provide written notice if they plan to redeem the total amount owed. Next, they must remit the funds to the party officially owning the subject property. State law determines the legal processes for these redemption rights. A qualified attorney is quite helpful in these circumstances.
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How To Buy A Foreclosed Home In 5 Steps
The process for buying a foreclosed home can be summed up in an easy five-step process, as outlined below. This is the same process as buying a home that hasnt been foreclosed on with a few small changes. For one, youll likely be working directly with a bank or mortgage lender that now owns the property and they could be much less responsive than an individual selling their home. Also, the way you find foreclosed homes can be different than your traditional housing search.
The five steps for buying a foreclosed home are:
Public Notice: Mortgage Goes Into Default
When you fail to make your home mortgage payments on time and do not take the steps necessary to prevent foreclosure, you will receive a notice of default from your lender. A notice of default is a serious action taken by a lender that notifies the borrower that their delinquent payments have breached the contract outlined in their home loan agreement.
In some cases, lenders will give the borrower a grace period before taking further action, or indicate in some way that the borrowers might have time to negotiate the terms of their contract. In other cases, the notice of default may serve as a final notification that action is being taken.
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Make Sure The Neighborhood Is Decent
You can add a lot of value to your home by making upgrades and renovating it. Doing so can add instant equity into the property. But another important factor that some buyers might not consider when it comes to appreciation in property values is the surrounding neighborhood.
The area that the foreclosed house is located in should ideally be a desirable one. A good neighborhood will support the value of the home over time. So, before buying a foreclosure, make sure to scope out the neighborhood and look for things like nearby amenities, healthy businesses, well-kept yards, good schools, and low crime rate.
Also, check out how many other foreclosures are in the neighborhood. If you notice quite a few foreclosure signs on front yards in the area, then it might be a sign that property values in the area are still on the decline.
Get Your Financing In Order
Before you start looking to buy a foreclosure at foreclosure auctions or through REO listings, its important to make sure you can get a mortgage. Buying with cash is the surest way to secure a property, but thats not an option for most homebuyers. If youre planning on using a loan to buy a foreclosure, youll want to prequalify and gain preapproval before you start looking. This is because youll have to show proof of funds before your offer is accepted, most of the time when buying a foreclosed property. They wont wait around for you to go get financing.
Preapproval will give you your mortgage rates and terms before you put an offer in. While you may think that getting a mortgage through the bank selling the property is your only choice, its not. The lender treats the foreclosure and new loan as completely separate transactions, and they are. As a result, its not easier or even advantageous to use the same bank, unless the rates and terms make sense for you. Finding the perfect mortgage lender doesnt have to be hard.
If youre planning on making a cash offer to buy a home, instead, then youll need to get your funds together and make sure they are ready to move when the owner of the home approves your bid. Youll have to move quickly once that happens.
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Communicate With Your Lender
If you know that you are going to have trouble making your mortgage payments, contact your lender immediately and let them know you are having financial difficulties. This allows your lender time to work with you to create a plan. Remember, do not stop paying your bills, and do not wait until you cannot make payments before you act. Learn how to talk to your lender about trouble making payments.
What Is A Voluntary Foreclosure
Voluntary foreclosures occur when the borrower has determined that they will be unable to make future home payments, and they choose to contact the lender in order to initiate the foreclosure process.
Borrowers might make the decision to voluntarily foreclose their home if they know there is no way to make future payments on their mortgage. It can be a smart move for those who know they are living beyond their means, have a sudden job loss, experience the death of the primary breadwinner, or hope to move into a more fiscally stable situation.
Some even choose to default on their home loans strategically knowing that their current home has become more expensive than its actual value.
Sometimes a property is so far underwaterwhere you owe more than your home is worththat it could take years before the home regains all of its value, writes Amy Lofsgordon, an attorney with expertise in foreclosure, collections, and debt. If that happens, borrowers sometimes choose to stop making payments, even if they could afford to stay current, simply because the home has become a bad investment. This is known as strategic default, which is sometimes called voluntary foreclosure or walking away.
She also notes, however, that there can be severe consequences for doing so, depending on the laws in the states in which you live.
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Drive By The Home In Person
While you might not have the luxury of going inside the home and checking it out in great detail, theres nothing stopping you from driving by the place. At least it will give you the chance to check out the property from the outside, which in itself can give you a good idea of the condition of the property.
An online listing might be a great way to get introduced to a foreclosure, but it will never give you the full scope of the property. Checking out a listing online only could mean you might miss important aspects of the home, such as the backyard.
If a property you see online meets your criteria in terms of location, size, and number of bedrooms and bathrooms, then its worth it to visit it in person, if possible.
How Does Foreclosure Work
Foreclosure is the process by which a lender takes possession of a home when a homeowner fails to make their mortgage payments. It has several stages, which are important for a buyer to understand when considering a foreclosure.
- Payment default and notice of default:Payment default occurs after the homeowner has missed at least one payment, and after several months of missed payments, a homeowners entire mortgage can default. This typically initiates the preforeclosure stage of the foreclosure process. A notice of default is usually sent by the lender after 90 days of missed payments. Foreclosure referral timelines will vary based on the contract agreement as well as the policies of the lender and investor in the mortgage. A homeowner is often given time to work out a new payment plan with the lender before the home is foreclosed and put up for sale.
- Notice of trustees sale:The lender must record the impending sale with the county and publish news of it in the local paper. This is one way of finding a foreclosure to buy, although an online search will generally be more effective.
- Trustees sale:The lender attempts to sell the property at public auction.
- Real estate-owned: If the property does not sell at auction, the bank will become the owner. They will then attempt to sell the property. For most people looking to buy a foreclosed home, especially those purchasing with a VA loan, this is the stage of foreclosure in which they will buy.
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Why Do Homes Go Into Foreclosure
When a person buys a home, the bank that lends the money for it undertakes a rigorous process to make sure the borrower can afford to pay. About 70% of mortgages last for 30 years, and unforeseen circumstances can cause someones financial situation to change dramatically.
Many homeowners found that out during the COVID-19 pandemic. Loss of a job or reduction in income led more homeowners to fall three months or more behind on mortgage payments than had since 2010, the height of the Great Recession. By June 2021, 15 months into the pandemic, 1.9 million Americans were still three months or more behind on mortgage payments. But it doesnt take a global pandemic to dramatically change financial circumstances.
Major reasons for foreclosures are:
- Job loss or reduction in income
- Debt, particularly credit card debt
- Medical emergency or illness resulting in a lot of medical debt
- Divorce, or death of a spouse or partner who contributed income
- An unexpected big expense
- Moving without being able to sell the home
- Natural disaster
Preforeclosure Vs Short Sale
Preforeclosure is the first step in a foreclosure proceeding brought on because the homeowner has failed to make 3 6 months of payments. Borrowers in preforeclosure have a few options to avoid foreclosure. Borrowers can pay the past due balance in full, work with the lender to modify the mortgage to reduce their monthly payment or sell the home through short sale or deed in lieu of foreclosure.
Preforeclosures and short sales are both sales conducted by the owner or a real estate agent. Short sales can be a little more challenging because the bank is involved and has the power to reject offers that have been accepted by the owner. Having a real estate agent with previous experience with distressed properties can be incredibly helpful and expedite the purchase timeline in some cases. Banks can be slow to respond and real estate agents familiar with the process can anticipate necessary paperwork and potential problems with lienholders.
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What Do You Need To Know About Foreclosures
There is much to know about foreclosures, but what homeowners, buyers and real estate professionals should know up front is that it is a process. And, the foreclosure process can be lengthy.
Foreclosure is also not an immediate consequence of missing a payment. For example, mortgage lenders will not start the process of foreclosure over a late payment. Generally, lenders give homeowners a grace period of 1015 days for late payments.
However, if the homeowner is not merely late on payments but has missed payments, the lender may start the foreclosure process. The foreclosure process will only be initiated by the mortgage lender after the homeowner has been delinquent paying the mortgage for more than 120 days.
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Additionally, many people do not know that there are three different types of foreclosures.
Another thing that is important to know is that foreclosure laws are different from state to state. Depending on the state, the phases of the foreclosure process may have different lengths, and homeowners may have different options.
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Bidding On A Home Thats Getting Foreclosed On
There are three ways to bid on a home thats getting foreclosed on:
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Understand That Foreclosed Homes Are Sold In As Is Condition
In a traditional home sale, homes are typically spruced up and staged to attract the masses of buyers, whh often prefer a home that is in move-in ready condition with minimal work to do.
Its why buyers include a home inspection contingency in their offers, which gives them a chance to scope out a home in detail to uncover any potential issues with the home that could throw a wrench in the deal.
Such is not the case with a foreclosure. These properties are sold as is, which is something that buyers must be entirely comfortable with. Its possible for a major issue to be identified after the home has been bought and sold. At that point, the buyer will have to put in the time, effort, and money to fix the problem.
The Benefit Of Buying A Hud Foreclosure
The upside for bargain home hunters is that HUD-owned properties are usually sold well below .
While anyone can buy a HUD home, the agency has a special program for teachers, police officers, firefighters, and EMS personnel called the Good Neighbor Next Door program, says Reiss.
This program allows people in those professions to purchase a HUD property at a whooping 50% discount if its in a revitalization area and the owner occupies it for three years. Revitalization areas are neighborhoods with very low income, low homeownership, or a high concentration of foreclosed homes.
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